Financial Literacy

Interest Rate Rise Adding to Student Loan Stress

The rise in the Bank of Canada’s interest rate will undoubtedly stress student pockets.

Students today are paying 40% more in university tuition than they did 10 years ago. This means lots of students are graduating with significant debt. That debt combined with living expenses can really strain student finances.

Consequences of Student Loan Debt

Today the average student graduates with over $16,000 in student loans, according to the Canada Student Loan Program. It can be lot harder to pay off that loan than students think. Many students don’t know the consequences of owing such a large debt. Or that it can take 10 years or more to pay off their debt. Having a large student debt can delay life milestones, like getting married, building a nest egg, owning a home, or even having children.

“We’ve lived in a very low interest rate environment for a long time now. For a lot of people, carrying debt has become a way of life,” explains Michelle Pommells, CEO of Credit Counselling Canada. “It’s been so inexpensive. Students have gotten used to very low costs of interest and will have to reconsider how they spend and borrow and really make some tough choices.”

For the first six months after a student leaves school, they will not have to make payments to their Canada Student or provincial student loan. This is called the six month non-repayment period. However, during this period, interest does accumulate.

Student loan holders can choose between a fixed interest rate (where the rate doesn’t change for the duration of the loan) and a variable, or “floating,” interest rate (where it can fluctuate). Given the Bank of Canada’s interest rate increase, students with floating rate loans will see their interest go up immediately. Those with a fixed rate loan will have to lock in their payments at higher interest rate than before the rate increase.

Hike In Interest Rates Not Only Affecting Student Loans

When the Bank of Canada changes how much it charges all banks to borrow money, all banks adjust the rates they charge consumers. Variable rate loans, lines of credit, and mortgages are the most affected credit products when the Bank of Canada interest rate changes. Everything from housing and mortgage costs for those students who own homes, and from credit cards to auto loan payments, will be affected.

Depending on how much interest rates rise, and types of debt students have, the average student can expect to pay hundreds of dollars more a year to service their debts. In some cases a lot higher. These hikes in interest rates could delay paying off debt.

Housing

In certain parts of the country, rent costs have hit an all-time high, jumpimg by over 30%. Credit Counselling Canada member agencies are seeing clients spending upward of 50% of their net income on housing, and some as high as 75%. These high costs of living place clients in a very vulnerable situation. One where they have little money left over to meet other day-to-day needs and financial obligations.

Credit Cards

Credit cards represent a major risk for students. The annual percentage rate on credits card can be anywhere from 15 – 20%,. That is significantly higher than the interest rate on a mortgage or a car loan.

Further upticks in the Bank of Canada’s interest rate might cause credit card borrowing rates to bounce by one or two percentage points. The effects of that can be much bigger than is seen at first glance. That is because the interest compounds. In other words, you begin to pay interest on what you owe plus the interest that you have been accumulating, resulting in interest paid on interest.

Transportation

In terms of transport, monthly payments for future auto loans could be a lot more costly too. This affects what students can afford to buy, or whether they can even own a car.

Change in Behaviour

Given the current economic climate, the biggest effect for students may be in having to shift how they think about spending and borrowing, and their money behaviours.

After more than a decade in a low interest rate environment, carrying debt has become can way of life for many Canadians, including students. Students who have gotten used to very low costs of interest will have to reconsider their spending and borrowing and make some tough choices.

It’s more important than ever for students to understand how to manage their finances, in order to protect their future. Credit Counselling Canada’s members provide non-judgmental support for students struggling with a debt burden. A certified credit counselling can help students:

Create a realistic budget to manage their expenses;

Make a plan to achieve their financial goals;

Explore debt repayment options.

If you could benefit from an appointment with a certified credit counsellor our members can help. Click here to find a credit counsellor near you.

Learn more about this topic by reading: Why Interest Rate Announcements by the Bank of Canada Matter – 8 Things to Know